Corus Entertainment's (CJREF) CEO Doug Murphy on Q2 2016 Results - Earnings Call Transcript

| About: Corus Entertainment, (CJREF)

Corus Entertainment, Inc. (OTCPK:CJREF) Q2 2016 Earnings Conference Call April 13, 2016 2:00 PM ET

Executives

Doug Murphy – President and Chief Executive Officer

Tom Peddie – Executive Vice President and Chief Financial Officer

Analysts

Adam Shine – National Bank Financial

Aravinda Galappatthige – Canaccord Genuity

David McFadgen – Cormark Securities

Drew McReynolds – RBC

Bentley Cross – TD Securities

Tim Casey – BMO

Robert Peters – Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2016 Analyst and Investor Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded Wednesday, April 13, 2016.

I’ll now turn the conference over to Doug Murphy, President and Chief Executive Officer. Please go ahead sir.

Doug Murphy

Thank you, operator. Good afternoon. I’m Doug Murphy and welcome to Corus fiscal 2016 second quarter analyst call. Joining me today on the call is Tom Peddie, Executive Vice President and Chief Financial Officer. As a reminder, there are a series of PowerPoint slides that accompany this call. The slides can be found on our website in the Investor Relations section.

We will now run through the standard cautionary statement on Slide 2. This discussion contains forward-looking statements that may involve risks and uncertainties. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in the company’s filings with the Canadian Security Administrators on SEDAR. As well, please note our presentation includes a disclaimer and statement on Non-IFRS Measures.

Before we share our Q2 operating results, we want to say a few words about how thrilled we are to have completed our game changing acquisition of Shaw Media. After months of hard work, careful planning and with a strong support of our advisors, lenders, shareholders, the CRTC, and our talented team, we crossed the finish line, closing our deal on April 1st. This marks the beginning of a new Corus, a bigger, bolder company with more scope and scale than ever before. We want to express our sincere thanks to the many people, who helped get Corus to this exciting new milestone.

Turning to Slide 3 and our consolidated results. Last summer, we stated that Corus’s goal for fiscal 2016 was to deliver modest EBITDA growth. Accordingly, we are pleased to report that the company achieved revenue and segment profit growth for a second consecutive quarter. The launch of our Disney suite of kids’ specialty channels combined with increases in digital distribution revenues contributed to consolidated revenues of $198 million, up 3% for the quarter.

Consolidated segment profit was $80 million, up 33% for the quarter. However, this excludes amortization of Pay TV programming and film rights of $14.2 million. Adjusting for this, segment profit would be up 10% from last year. Net income attributable to shareholders was $102 million or $1.17 per share for the quarter, compared to a net loss of $87 million or $1.01 per share last year.

The Q2 results includes business acquisition, integration and restructuring costs of $6 million, a gain of $86.2 million from the disposal of the Pay TV business, and excludes amortization of $14.2 million on paid television program and film rights. On an adjusted net basis, net income attributable to shareholders for the quarter was $20.9 million and earnings per share was $0.24 a share compared to $28.5 million and $0.33 per share respectively in the prior year.

In our television business, we delivered top and bottom line growth for the quarter. Revenues were up 5% and segment profit adjusted for the amortization of Pay TV program and film rights was up 13% for the quarter. Gains in television were driven by increases in subscriber revenues and from growth in merchandising, distribution and other revenues. The addition this year of the iconic Disney Channel bolstered our subscriber revenues, which are up 5% in the quarter.

Growth in distribution revenues from content licensing deals in the SVOD market contributed to a meaningful 40% increase in merchandising, distribution and other revenues. In January, we signed a comprehensive content deal with Show Me for more than 700 hours of Nickelodeon content and we secured an additional sales of Nick titles to Netflix. We also benefited from one-time transitional service revenues of $6.5 million related to the discontinuation of our regional Pay TV business on February 29. While advertising revenues were down 8% due to soft demand in the consumer packaged goods category, this was partially offset by double-digit growth in kids directed advertising.

Turning to radio. The business continued to face headwinds in Q2. Revenue and segment profit for radio declined 6% and 17% respectively. The majority of this shortfall is attributable to the Edmonton market, which is feeling the impact of a weaker Alberta economy and to Winnipeg, where programming changes have not yet translated into improved ratings and revenues. These shortfalls were somewhat offset by ongoing growth in Q2 key markets, Vancouver and Ottawa, which continued to perform well.

We're also encouraged by the most recent winter PPM ratings at radio, which were released subsequent to the quarter. Among the highlights in Calgary Country 105 maintained its number one position and Q107 climbed number three with adults 25 to 54. The Vancouver Rock 101 and CFOX maintained their ranking among the top four stations of adults 25 to 54 underscoring the positive impact of changes we made to the Vancouver stations last year. At Corus, we remain intensely focused on advancing our strategic priorities. These are one to own and control more contents, two to engage our audiences, and three to expand into new and adjacent markets.

Turning to Slide 4, in Q2 we announced that we are entering the live events business with the launch of Corus Live. This is a great example of how we are leveraging our strengths and capabilities to engage our audiences and expand into new and adjacent markets that drive new revenue streams for the company. We look forward to kicking off our first Corus Live production in July with a two-day star-studded festival. CMT Music Fest features an incredible lineup of talent that includes two of the biggest names in country music headliners Eric Church and Zac Brown Band as well as Kira Isabella, Meghan Patrick, newcomers Drake White and the Big Fire and the duo Brothers Osborne. Last week, we added two more big acts to the roster: best-selling artist Kip Moore and Canadian music hall of famer Tom Cochrane. The response has been extremely positive. Ticket sales and sponsorship revenues are advancing well. It's going to be an amazing event and this is just the first of many to come.

Moving on to Slide 5. On January 13, we announced our proposed acquisition of Shaw Media from Shaw Communications. Just 58 business days later, on April 1st, we closed this landmark deal, changing the face of the Canadian media landscape. This groundbreaking acquisition brings together two of Canada's leading media companies more than doubling our size and giving us the scale, the brands, and the talent to succeed in a highly dynamic and competitive marketplace both in Canada and around the world. Combined, the new Corus as a portfolio of 45 specialty channels, 15 conventional television stations, and 39 radio stations, our world class global content business and a significantly strengthened digital footprint.

We reach over 30 million Canadians every single week. This is an impressive number and it’s a reminder that while the industry is evolving, radio and television continues to drive enormous, relevant and valuable audiences. The juggernaut of global television, which reaches 95% of the country, gives us the scale and the reach to cross promote our brands on all platforms and engage with our consumers across the Corus universe. We have already started to leverage this opportunity. In fact three days after our deal closed, we aired The Academy of Country Music Awards live on global television with an encore presentation the next night on Country Music Television, CMT, promoting both broadcast and our upcoming CMT Music Fest across our platforms.

This is just one example of how we can effectively drive audiences through strategic cross promotions and marketing synergies. With our combined assets, we are well positioned to succeed in the new pick and pay environment. As you know global is a must carry basic service and the combined rankings of our powerful channel brand portfolio are impressive, with 7 of the top 10 for adults 25 to 54 six of the top six channels for women between 25 and 54.

Five of the top five kids channels for the calendar year. We are very excited with this opportunity to present this diverse and powerful portfolio. By bringing our BDU partners the best mix of these compelling brands and content available across all platforms, we can now offer them new ways to merchandise our channels to their consumers and our audiences, another and important advantage of our new found scale.

Turning to slide 6. With the With the close of the transaction, we hit the ground running. On day one, we announced a new executive team that builds on the skills and exceptional leadership talent from both companies. Our new senior talent team includes Barb Williams as Executive Vice President and Chief Operating Officer for the Company, responsible for driving audience growth through the acquisition, commissioning and creation of content across our portfolio. Her team will also focus on leveraging our brands through the cross promotional heft of the new Corus.

Greg McClelland is our Chief Revenue Officer, responsible for maximizing the value of the audiences that Barb's team generates through advertising and subscriber growth. In this capacity, Greg and his team will be responsible for leveraging the powerful combination of qualitative consumer insight and quantitative data analytics to provide innovative advertising solutions for our clients.

Colin Bohm moves into a new position as Executive Vice President, International Development and Corporate Strategy, with a mandate to identify new business development initiatives that will grow our revenues both domestically and internationally. Colin will also manage the Company's strategic planning and mergers and acquisitions activities.

Tom Peddie continues as our Executive Vice President and Chief Financial Officer. Cheryl Fulton, who is fairly new to Corus, is our EVP of People and Communications. Shawn Kelly takes on the role of Executive Vice President, Technology. Gary Maavara continues as Executive Vice President and General Counsel. And Kathleen McNair remains in her critical role as Chief Integration Officer. Kathleen has been a driving force over the past few months, and will continue to play a role as we integrate the two Companies.

We have been a combined Company for less than two weeks; but with our new leadership team in place, we are working hard to insure a swift integration. In addition to completing the deal and announcing our new leadership team, we also marked day one as a new Company by unveiling our redesigned corporate logo. We felt that this was the right time to redefine our brand, and it's a powerful visual cue for the change and transformation of Corus. We really like our bold new look, which is being rolled out across all of our operations.

Turning to slide 7, with the recent close of our Shaw Media deal, I would now like to ask Tom to briefly review our financing of the acquisition, as well as our new capital structure going forward.

Tom Peddie

Thank you Doug. On April 1, 2016 we acquired 100% of Shaw Media from Shaw Communications for 2.65 billion, which was paid through a combination of 1.85 billion of cash and the issuance of approximately 71.4 million Corus Class B non-voting shares. Our original plan was to finance the transaction with a combination of 2 billion in bank debt, and approximately 600 million in equity and high yield bonds.

however, the capacity in the bank term debt market was much larger than we had initially anticipated. As such, we were able to complete the financing on much more favorable terms by just accessing the bank term market and equity, and avoiding the high yield market entirely, where there was little demand in the month of February and prohibitively high coupon rates.

As a result, our interest rate on the bank debt is closer to 4%, versus the possible 9% coupon rate on the high yield. The equity portion of the funding was issued in the form of 32,770,000 subscription receipts, which automatically converted on a one-to-one basis to Corus Class B shares on April 1, 2016. With this approach, we established senior secured credit facilities of 2.6 billion to fund the transaction and repay existing debt. This consisted of 2.3 billion term facility, which was fully drawn at closing, and a 300 million revolving credit facility with a four-year term that was undrawn at closing. The term facility consists of two tranches, a three-year term for one third of the 2.3 billion facility and a five-year term loan for the remaining two thirds portion.

As part of our financing plan, we recently announced the redemption of our 4.25% senior unsecured guaranteed notes due 2020, with a redemption date of April 18, which is next Monday. Moving forward, our prudent financing of this acquisition, in addition to our strong free cash flow generation, will enable us to maintain our strong balance sheet and financial profile while providing sufficient flexibility to sustain our current dividend of 1.14 per Class B share.

We are pleased that with this structure in place, we can uphold our longstanding commitment to return cash to our shareholders. For the remainder of the year, even though we have combined our two operations, our goal is to have Corus and Shaw Media deliver on their respective budget numbers for fiscal 2016. Today, it is not our intention to take questions on Shaw Media results for Q2, since we did not control the asset during that period. Our understanding is that Shaw Communications will disclose Shaw Media Q2 results tomorrow.

We also want to remind you that in July, for our Q3 call, we will we will be reporting on a combined basis the results for the first time for the two months of Shaw Media, effective April 1 and Corus obviously for the three months. So you'll see consolidated results in our Q3 call. Doug back to you.

Doug Murphy

Thanks Tom. Turning to slide 8 and our priorities for the back half of the year. We are rolling out our integration plan quickly to bring the two Companies together. With the deal closed and the financing in place, our focus for Q3 and Q4 is two fold one successfully execute on our integration plan; and two, focus on delivering results. We remain committed to capturing 40 million to 50 million in annual cost synergies within the next 18 to 24 months, while at the same time leveraging new opportunities to further build our brands and our business. As we bring the companies together, our goal is to design the right structure to drive long-term growth and align our Business for success.

To do this right, we want to move quickly, but at the same time, thoughtfully. We expect to have the final organizational structure in place by the end of this fiscal year. While we are integrating the Companies, we also remain focused on Corus's prior commitment for this fiscal, to deliver modest EBITDA growth by executing upon our strategic priorities.

We have a solid integration process in place, with dedicated resources, disciplined timing and a detailed action plan. This is an extremely exciting time for us. There's a lot of hard work ahead, but the opportunities are enormous. Our new found scale, combined with our powerful and synergistic collection of assets, will be a catalyst. We hope you have found these comments helpful. And now we would be happy to take any questions you may have. Operator over to you.

Question-and-Answer Session

Operator

[Operator Instruction] Our first question comes from the line of Adam Shine with National Bank Financial. Go ahead.

Adam Shine

Thanks a lot. Good morning. One question for you Doug and maybe one for Tom, as well. Q2 is a seasonally light quarter. At the same time, I think you’ve faced some relatively easy comparables last year, and then you also had the benefit of the Disney Channel launch. Doug, can you elaborate maybe a little bit more on what you're seeing out there in the ad market? Because obviously, you guys are the first the broadcasters to report some of the early 2016 trends. They look like they are a bit weaker than I think maybe some might have anticipated. That would be one, and then a quick question for you, Tom. I'll just throw it out there for later. All your debt after the Shaw transaction will be floating, obviously a pretty attractive 4% or so rate. Any plans to do any hedging or anything else in terms of dealing with the interest rate floating risk? Thanks

Doug Murphy

Hi Adam, it's Doug. I'll take your first one. As regards to the ad climate, just a couple comments. We look at the ad marketplace from two vantage points. One is demand management and the other is demand creation. Demand management, effectively, is optimizing our yield on our inventory and ensuring that we price effectively and we make sure every unit of inventory is maximized from a value perspective. Demand creation is when go out there and we pitch integrated campaigns, leveraging our lifestyle reality television shows, layering in our KIN Community, MCN, with a TV brand sell and offering a premium solution for our advertisers.

We are seeing exciting growth in our demand creation part of our portfolio. Our integrated advertising business is up nicely, our work with the MCN is also performing really well for us. And we're pleased with the close rate we're seeing on all of our initiatives in business development, which really key off of our proven ability and the customer insights part of the business.

From the overall ad economy point of view, we characterize it as we have in the past it's still very late, visibility is pretty immediate, not very long term. We have seen some promising sort of bid out there, it's not surprisingly correlated to some of the recent GDP firming up that would appear fingers crossed firmly as I say that but at this point in time I will characterize the ad economy still as relatively soft but one thing I can say is strong continue to be our ratings performance and so we've always said that provide that we continue to win on the ratings audience delivery will be in a good place when we get the inevitable firming in add economy. So that's a long answer to your question, but I hope that gives you some color.

Adam Shine

Well I appreciate that. And two questions sorry. No you go ahead Tom, sorry.

Tom Peddie

Okay Adam we agree with your observation about the interest rate market. There are some very attractive opportunities out there to hedge the debt. We will lock in some interest rate swaps on that for a majority of the debt. We just are working on the timing of that.

Adam Shine

Okay great. I'll queue up again thank you very much.

Doug Murphy

Thank you Adam.

Operator

Our next question comes from Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

Aravinda Galappatthige

Good afternoon, thanks for taking my questions. With respect to the new affiliate agreements that you're obviously I assume you're mostly done at this point with the BDUs both for Corus and Shaw, Doug I was wondering if you can talk to sort of the main changes that have occurred or some of the main features there, particularly with respect to downside protection on the subscriber revenues and also if you don't mind, I mean, in terms of subscriber sees on a per sub basis, directionally where has that gone as we enter the pick and pay environment?

Doug Murphy

Thank you and happy to answer that question. I would say a couple comments. First of all I think we're demonstrating that we are growing our business in the light of the concerns over the Let's Talk TV, pick-and-pay environment. We are seeing no apparent negative impact on our revenues whatsoever at this juncture from the rollout as of March 1. The growth in our subscriber revenue is really tied to the rollout of our Disney services. The rate of growth will continue to improve over the coming quarters in that regard as we had told TheStreet in the previous couple quarters it will phase in. It is accretive in year one as we've also said.

And so and we have the ability now and we are in deal on the vast majority of our services for two to three years and a few examples where we are not in deal and now that we've integrated – begin to integrate our business we will be obviously bringing our whole suite of services to our BDU partners as they consider how to best merchandise their skinny packages, their à la carte offering, their new packaging. And as I said at the outset we continue to be extremely strong from a performance basis with items delivery on women and kids.

And we think that puts us in very good sched when those subscribers consider changing their packaging.

Aravinda Galappatthige

Great, thanks for that Doug. And just to kind of switch gears from there, with respect to the content side of your business, Nelvana obviously doing well for both this quarter and the prior quarter. Can you just remind us about on the merchandise side, some of the titles that you've been lining up to generate revenues on that front. Maybe give us an update on that where things stand?

And generally speaking, your long term plans to grow the content side of the business, both Nelvana and on your more unscripted content side, as well.

Doug Murphy

I’m happy to. First off, I was just describing this most recent quarter, I would just declare as I said in my opening comments there's a lot of digital SVOD revenues that are represented in that line item. So there's a bunch of things to show up there merchandise and digital in this case we've been very successful monetizing our investment in the Nickelodeon platform of rights this years, as well as our continued success with the Nelvana library both domestically and internationally.

So you’re seeing a lot of growth coming out of digital in the last couple of quarters and we have reason to believe that’s going to continue. The delivery of new episodes for Nelvana, the principal property that's new that's in the market at this point in time is little charmers. You’re going to see in the coming quarters a meaningful ramp up in the delivery of episodes not so much the summer quarters but probably early into the fall. We expect to start rolling on a number of new shows, some of which we’ve announced, some of which we're about to announce. I'm being a little bit opaque here on purpose, forgive me but we expect to grow our episodic delivery meaningfully over the next coming years.

We’re going to do that organically by working with some of the best partners and some of the shows we can talk about are Camp Yeti, more Little Charmers, Mysticons, ZhuZhu Pets. Those are all shows that we have out there, and one more to be announced which is a big one. So those are all kind of in queue and ready to roll. We've just concluded a fairly robust review of our Nelvana content development slate and we're, frankly, in mid step in terms of doing some reorganizing of our talent base in the studio. You may have seen the Scott Dire is back as the President of Novana and he's thrilled to be back at where this all began for him.

And we are maintaining an intense focus on growing the kids content business, through organic activities primarily, although with Colin in his new role now in Aravinda, we will have more of an active sort of file on looking at tuck-in acquisitions. We have no appetite at this juncture as you might imagine for any further large acquisitions. But we'll clearly look at opportunistic tuck ins if it's additive in the kids content side.

Now with regards owning more content in the other part of our business the one that we're also similarly and equally excited about the lifestyle reality world is one that we launched that business in the fall, we’ve now gone to two markets, we’re into the millions of dollars of revenues on that part of the business. We're absolutely thrilled to have all 45 specialties now in our house and have Barb and her team, John McDonald and Daniel Eves, working on maximizing how we invest our CPE, Canadian programming expenditures, both to drive our audiences in Canada to monetize in our domestic media business, but increasingly to own economic interest if not a significant interest in the back end and then to distribute that ourselves internationally leveraging our existing infrastructure so that's a nice margin business for us, as you'd imagine.

So there’s going to be an intense focus on that as we go through the integration work. Now we hope to ramp up the number of shows, we're selling internationally. We have five now and we aren't at liberty to declare what the goal is going to be, but we will be in the coming quarters. And again in that area we might well look to other potential tuck ins if it makes sense but it's going to be sort of a measured approach to growth but it's clearly one of our priorities because we want to be a strong, efficient, highly cash generative media Company in Canada that funds the delevering of our balance sheet, the ongoing payment of our dividend, and investments for growth in the international content marketplace.

Aravinda Galappatthige

Great. Thank you for that again just a small housekeeping question before I go. With respect to that $6.5 million transition services payment from Bell, how should we think about the margin there? Is that sort of like 80%, 90% margin revenue item there?

Tom Peddie

Aravinda, it’s Tom. Yes so it's fairly basically all margin so your numbers would be pretty accurate.

Aravinda Galappatthige

Great. Thank you. I'll pass the line.

Doug Murphy

Thank you.

Operator

Our next question comes from the line of David McFadgen with Cormark Securities. Please go ahead.

David McFadgen

Yes, hi. I have a couple of questions. So just first of all, just want to ask about the deals you announced on the SVOD to Netflix and Show Me. Is this content first-run content that you're showing on your channels right now or is this older content?

Doug Murphy

Primarily library.

David McFadgen

Primarily library?

Doug Murphy

Yes, yes.

David McFadgen

Okay.

Doug Murphy

We're very disciplined about I know where your question is going David, that’s why I jump in front of that. We are very disciplined about how we window first run for window series. So we look primarily to debut first window on the linear surfaces and we have a disciplined windowing strategy to monetize those on SVOD surfaces.

David McFadgen

Okay. Was that content sold on an exclusive basis or non-exclusive?

Doug Murphy

Principally non-exclusive although increasingly now if the price is right we'll do a short-term deal on a certain season of a certain show, so again, what's important to note here is we use this metaphor a lot and it's purposeful of that we want to help our BDU partners and our SVOD partners merchandise their wares at their store fronts as you would to maximize there and our business and so if there's value there for both sides then we’ll consider that. All the while we need to also be very mindful of supporting our linear business and the TV Everywhere apps that we roll off our linear business that are for authenticated viewers.

So there is a bit of – even imagine with all the episodes we manage with these various content deals there's a substantial amount of work that goes into sort of deciding how to allocate that content but increasingly we're looking at ways to grow both of our businesses and we've been successful obviously in doing that.

David McFadgen

And in the past, you indicated that you're exploring the idea of your own SVOD service. Is there anything to update there?

Doug Murphy

We are exploring that idea and we will have something in the future and I'm not too distant future but again I'm being a little opaque in this one. There's some work being done.

David McFadgen

Okay. That sounds exciting. And then you talk about the CPG ads still being challenging. We've seen the Canadian dollar appreciate versus the U.S. dollar. In the past, when the Canadian declined versus the U.S., it hurt you. Now the Canadian dollar is climbing a bit versus the U.S. dollar. Do you anticipate that that could be a little better?

Doug Murphy

Yes. I mean, clearly the Canadian dollar is climbing because petro dollar rate so we're getting we have the benefits of firming oil commodity pricing and to came towards that continued I think there will be corresponding firmness in the ad economy and that will translate into the CPG marketing commitments.

I would also say that, we were described in the past some of the challenges that Corus had as a standalone with certain CPG companies that kind of bought around us, so I can declare unequivocally that's not going to happen any longer. So we expect to be able to go and acquire some incremental share that we have lost in previous quarters.

David McFadgen

Okay, all right. That's it for me, thank you.

Doug Murphy

Thanks, David.

Operator

Our next question comes from the line of Drew McReynolds with RBC. Please go ahead.

Drew McReynolds

Thanks very much. Good afternoon. A couple for me. Doug, you talked about the demand creation. Just wondering if you could dive a little bit more into the next generation advertising and what the traction is with advertisers around the data that you're offering up. And a second one for Tom, the payment of programming and film rights in the quarter was around $67 million, a little up versus Q1. Can you just remind me for modeling purposes, this looks to be probably a better run rate going forward, but is there seasonality that you typically see in this line item in a typical year? Thank you.

Doug Murphy

Hi, Drew, this is Doug. There is a couple of things in demand creation, I will give you an example, and there's two pieces so I'll start with the qualitative side and this is wherever the marriage of these two businesses are just absolutely outstanding to consider the opportunities in the future, of course there is always been staked our claim on being a real focused on consumer insights, behaviors and we bring those to our clients and advertising agencies and we use those to affect new business. Example, we are just coming out of field now on a study called families and finance and it’s designed around educating parents and kids on notions of financial literacy and clearly, that would be targeting banks of which everyone on the phone by the way I know many of you work for bank. So may remind you CMOs there is good opportunities over here.

We are now rolling out this very interesting piece of research to banks on the merits of telling their story on our co-view and kids networks financial services is a segment where we're under shared vis-à-vis the audiences we deliver and we get very surgical when we look at Biz Dev, because we basically look at the category, look at our tuning on that against audience delivery and we see we are under shared and we go after the business. And so we’ll roll out something like this research study and we take it to every financial institution in the country, and we've already got a couple pretty keen on it so that's an example what we are doing on Biz Dev there.

Now on the return kind of data NextGen side, for example, let's say a given financial institution had a database of some sort. We could overlay that database on some of the data we're pulling off of return data and then we could segment that and target that audience directly and so what you get we marry those two together is kind of one-to-one makes three plus is you have the ability to target in a much more specific manner using either data you purchase, from Environix, for example, or data from the client and that you leverage your insights to get all the way to bright on the advertising commitment. So that is one example and we have number, we have 25 of those underway in various stage right now, if we look to create demand.

Tom Peddie

Drew it's Tom. You're correct, we do have seasonality in our program spend. As you also know we clearly focused on our free cash flow on a quarterly and on an annual basis. With respect to your comment about would this be a normal rate on a go forward basis, you need to keep in mind that we had Pay TV in in Q2 but we’ll not have Pay TV in in Q3 and Q4, so you would expect that number to drop off.

Drew McReynolds

Okay. Thanks, Tom. Understood. And then if I can just add one more. Doug, you mentioned growth in production, obviously a key strategy, and I think that's been very, very well articulated. Can you just give us a sense of the demand and supply factors out there? Are you ramping up production in a way that you're trying to balance the near-term free cash flow drain with the opportunity, maybe with production capacity at your facilities? I'm just trying to figure out, are you seeing more demand essentially than what you can meet in the marketplace?

Doug Murphy

There's like three questions in there. Let me see if I can pick them apart. One is – and I’ll talk, the kids business is kind of unique creature. We have spoken to you before about the Corus advantage, we maximize the money that we can spend in ourselves, we do that, we trigger tax credits and subsidies because we have a resident production studio and then we are virtually fully financed out of Canada. But for now, we have output deals internationally that covers the rest of the deficit, so we come out of the gates fully funded and into margin. And the factor is that contribute to a green light really are based on the state of the IP, the toy partners, the U.S. broadcast placement, and some of the snowflake elements of the deal, which I've used before. Now as regards to the other content piece, we're not chasing down $2 million for drama procedurals per episode. We're focused pretty intently on lifestyle reality, Property Brothers is the example I've used often. We like that area for a number of reasons, same investment levels, animation, highly integratable advertisers, can build shows like that pretty quick.

It’s a quick turnaround, quicker than Nelvana, coincidentally. And those shows sell well internationally. We just came back from MIP TV and we sold Master Flip to an Australian broadcaster who is now interested in another season. And so we are not going to get a hurt from an investment level. We are clearly, as we've communicated before, focused intensely on delevering. And we are going to work within our existing system of required spending to fund these initiatives, much in the same way as we did these five shows that we're selling out of the old Corus, if you would. Now we just have a much bigger CPE number and we are going to look judiciously on how to direct that funding towards our strategy of owning more content in that lifestyle reality genre.

Drew McReynolds

Okay. Understood. Thanks, Doug.

Doug Murphy

Yes. Thank you.

Operator

Our next question comes from the line of Bentley Cross with TD Securities. Please go ahead.

Bentley Cross

Good afternoon everyone and welcome to the new team members.

Doug Murphy

Thank you.

Bentley Cross

I just wanted to first ask about subscription revenues. Obviously, nice to see a solid increase there, but I’m hoping you might be able to parse out how much of that is Disney driven and how much is going on in the underlying base business?

Doug Murphy

Disney is an obviously important part of our growth. We’re not going to sort of segment it. I think what I’ve tried to do in my comments both in the opening scripted comments and my subsequent answer to a question was just to underscore our consistent opinion since a year ago March when it was first announced that we are well positioned to win in the new à la carte less talk TV, pick and pay universe. We think we’ve got to put the consumer first. We want to go where the consumer is. We were in a good position before the merger. We’re now in even better position.

I think what I believe people are beginning to realize and a number of you in the call have written this up in some of your recent reports is that we’re demonstrating what we’ve said is that our subscription profile is good. And the growth you’ve seen in this quarter will continue to grow. So what I will say is that the core networks revenue is unaffected at this point in time or early days, but it’s unaffected.

And we have in all of our carriage agreements, modest inflation to the extent to which we have any cord shaving. We have penetration base rate cards which while they may not be cold, they’re pretty close. So the core system is solid. And then you layer in the Disney suite of services on top of that which have an increasing growth profile over the next few years and I think you can get your head around pretty consistent growth on subscriber revenues.

Bentley Cross

Okay, that’s helpful. And following up on that, and also on what you said earlier about Disney accelerating throughout the year. Should we assume that there are still some free or discounted previews in there and we should see the growth rate accelerate throughout the second half?

Doug Murphy

No more discounts. We’re full freight right now.

Bentley Cross

And then how about on the advertising side?

Doug Murphy

We’re growing. We’re getting nice growth on kids advertising I alluded to double-digits in my opening comments. The audiences have come over and have come over fast over to our Disney channels. So we’re dining out on that audience growth has been significant.

Bentley Cross

Okay, that’s helpful.

Doug Murphy

Thanks.

Bentley Cross

And just switching gears. One more question before I pass the line. Obviously don’t want to talk too much about Shaw Media, but I’m hoping you’re going to be willing to share kind of what your game plan is or if you have a game plan for 50, 100 days out, and how that integration plan is going in these early days?

Doug Murphy

We will be happy. Well, I’ll say one thing Ben, our strategic priorities remain the same, which is why we articulated them in my opening remarks. And the acquisition of Shaw Media just accelerates those priorities in a meaningful manner. But we most certainly will be – as we complete our innovation process, we most certainly will be talking you more about the exciting future. But I think you can expect it to be continuation of the strategy that we’ve articulated.

Bentley Cross

Okay. Thanks guys. I’ll pass the line.

Doug Murphy

Thank you.

Operator

Our next question comes from the line of Tim Casey with BMO. Please go ahead.

Tim Casey

Thanks. Good afternoon. Tom, what was the contribution from Pay in the quarter? Are you able to give us the revenue in EBITDA?

Tom Peddie

Tim, it’s Tom. I’d say the simple answer is no, because we don’t generally break those out. But what I’ll do is I’ll make the comment that when we announced the disposition of this particular asset, we said that generates about $125 million in revenue about $32 million in EBITDA. And those numbers are spread fairly evenly between the first half and the back half. So when you start to look at Q3 and Q4 on that simple math, you would assume that we would have lost about $16 million in EBITDA and about $162 million in revenue in the back half of the year. But I’m not going to get into a specific discussion of the quarter itself.

Tim Casey

Okay, fair enough. How did Pay perform in the quarter? Was there any growth there?

Tom Peddie

I would say the simple answer would be no, but that wouldn’t be surprising because we were effectively working on a transition as quickly as possible to help Bell launch a service in Western Canada, but that wouldn’t have been our particular focus.

Tim Casey

Right. Okay. So if we start adjusting for the Pay contribution in the services revenue, really net-net, there wasn’t any growth in the quarter, it was flat.

Tom Peddie

Not flat up a bit. I’m going to say up a bit.

Tim Casey

Yes. Okay. All right, thank you.

Doug Murphy

Thanks, Tim.

Operator

[Operator Instructions] Our next question comes from the line of Robert Peters with Credit Suisse. Please go ahead.

Robert Peters

Hi. Thanks very much for taking my question. Maybe shifting from kind of the top line to the bottom line and looking at costs, we obviously saw good cost control on the Pay TV – on the TV side of things, and I know some of that is the amortization stopping on the Pay TV side. But getting maybe a little granular, your other cost of sales also dropped by, what looked like 50%. And I was just wondering if that was anything related to spin down of the Pay TV as well or what was driving that?

Doug Murphy

I’m going to jump – I’m going take a crack at this one, unless Tom gets a better answer.

Tom Peddie

I think Robert, it’s probably our merge – our merger revenues were lower. So cost of goods sold would be lower.

Doug Murphy

And deliveries.

Tom Peddie

And deliveries would have been a bit lower. So I think that’s where it is, but I think that’s the answer we would provide.

Robert Peters

Perfect. And maybe kind of jumping to the Pay TV who side of things obviously went back when those assets have ceased operation going into the next quarter. You’ve already taken out the amortization in terms of the remaining cost that you kind of sustained in operating that business through this quarter. Are those going to be going away or is it a situation where you might be reallocating the headcount to another part of the company?

Tom Peddie

Well, we’ve already reallocated some headcount to other parts of the company by individuals who were fully dedicated to the particular service. A number of them are no longer with us. But clearly our goal on a go-forward basis is to take out costs where appropriate. But we have a big challenge in front of us with combining Shaw and Corus. So that provides us with lots of opportunities to move people around.

Doug Murphy

And maybe if I could just add a little bit Robert, it’s Doug here. Obviously because we were related parties, we were able to start thinking about the future in the past. And we were able to get smart about looking at our open positions and continuing strategies, and ensuring that we had a line of sight to the most talented people in our team, and trying to make sure we had ongoing roles for them.

Now that we are one, as I mentioned in our comments, we have a very well resourced, disciplined integration office. We have tasks now. Our top 43 executive leaders in the announcement we made on closing April 1 with synergy targets, challenges to design their organization down to the ground. But also we’re looking at non-headcount costs. So I’ll just give you one example and we use it in our remarks, and how we promoted our CMT Music Fest on the Academy of Country Music Awards. That meant we didn’t have to spend a couple $100,000 on purchased media for that very same purpose. We’re looking at all of our marketing budgets around the company now for the back half of the year. Now that we have this massive promotional platform, you can bet your bottom dollar here. We’re going to start dialing back some of that cash out the door spending.

So, we have a real opportunity to move decisively to kind of look at our cost structure, pretty quickly in some cases, and the marketing one being a prime one. And we’re going to continue to make sure that we do that, so that we’re able to hit our targets.

Robert Peters

Perfect. Thank you very much.

Doug Murphy

You’re welcome.

Operator

There are no further questions at this time. I’ll turn the call back to the presenters.

Doug Murphy

Great. Thank you, operator, and thank you everyone for your continued interest in the new Corus. We are absolutely excited to embark on this new adventure with all of you and look forward to speaking to you in the months, weeks, and days to come. So thanks very much and have a great rest of your day. Bye-bye.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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